Record Highs Meet Rising Risks

May 4, 2026

Executive Summary

The investment backdrop remains constructive but increasingly nuanced. Strong corporate earnings, resilient economic activity, and continued AI-driven investment are supporting markets, even as participation remains narrow and external risks rise. At the same time, geopolitical tensions in the Middle East are pushing energy prices higher and complicating the outlook for inflation and monetary policy. As a result, markets are entering a more sensitive phase, where solid fundamentals are increasingly offset by elevated uncertainty.

Key Takeaways:

• Equity markets reached new highs, supported by stronger-than-expected earnings, though leadership remains concentrated in a narrow group of large-cap technology and AI-related stocks.
• Economic growth remains resilient, driven by strong business investment.
• The labor market continues to stabilize under a “low hiring, low firing” dynamic, with limited evidence of widespread layoffs.
• Inflation remains above target, and rising energy prices tied to geopolitical tensions present renewed upside risks.
• The Federal Reserve remains on hold amid increasing internal disagreement, with markets now pricing in fewer, or no, near-term rate cuts.

Financial Markets

U.S. equity markets extended their advance last week, with the S&P 500 closing at its 14th record high of the year. April marked a particularly strong period for equities, delivering the best monthly performance for the S&P 500 since the post-pandemic rebound in November 2020. The equal-weighted S&P 500 remains below its late-February peak, underscoring that a relatively small group of stocks continues to drive overall index performance.

Earnings season has provided meaningful support. First-quarter results have exceeded expectations by a wide margin, with the blended S&P 500 earnings growth rate ending last week at 27.1%, more than double the 12.6% anticipated at the start of the reporting period. Several mega-cap technology companies reported earnings last week and reinforced the durability of AI-related demand, highlighting continued strength in cloud computing, digital advertising, and infrastructure investment. At the same time, these results have also revived familiar questions regarding the sustainability of elevated capital expenditures and the timeline for monetizing these investments.

Beyond equities, cross-asset signals have turned more cautious. Treasury yields and oil prices moved higher during the week, driven largely by ongoing geopolitical tensions in the Middle East. Over the weekend, conflicting reports of a potential Iran–U.S. naval incident added a new layer of uncertainty, pushing oil prices sharply higher and shifting market sentiment toward a more defensive posture.

Economics

Recent economic data point to a resilient but moderating growth backdrop, with strength in business investment offsetting more measured consumer activity. Core capital goods orders rose 3.3% in March, reflecting continued momentum in equipment and AI-related investment, while first-quarter GDP grew at a 2.0% annualized pace. Although slightly below expectations, the underlying details were more constructive. Business investment expanded at its fastest pace in nearly three years, helping offset drags from net exports and inventories and reinforcing corporate spending as a key pillar of the expansion.

Consumer activity remains positive but is gradually slowing, with personal consumption rising 0.9% in March, suggesting continued, but more selective, spending. Labor market conditions continue to reflect a “low hiring, low firing” dynamic, with initial claims falling to their lowest level since 1969 and limited evidence of broad layoffs. At the same time, inflation remains elevated, with core PCE at 3.2% year-over-year and wage growth steady, suggesting the economy remains intact but increasingly balanced between strong business demand and moderating consumer momentum.

Policy

The Federal Reserve’s April meeting reflected a more complex and divided monetary policy environment. As expected, the Committee left the federal funds rate unchanged. However, there were four dissents, the highest number since 1992, highlighting increasing divergence among policymakers. Most notably, several officials opposed retaining language suggesting an easing bias, while one favored an immediate rate cut, reflecting rising tension between persistent inflation and a gradually cooling labor market.

Chair Powell described the discussion as “vigorous” and signaled a shift toward a more neutral stance, emphasizing that the Fed is not yet prepared to ease policy. He pointed to upside inflation risks tied to geopolitics, supply chains, and trade, noting that greater confidence is needed that these pressures, particularly from energy, are temporary. Ongoing Middle East tensions further complicate the outlook, as a sustained energy shock could push inflation higher while weighing on growth, potentially limiting the Fed’s flexibility and extending the current policy pause.

Notably, this meeting marked Powell’s final one as Chair, concluding a tenure defined by navigating some of the most volatile and complex economic conditions in modern history. We thank him for his steady leadership and service. While stepping down as Chair, he will remain on the Federal Reserve Board as a Governor after May 15, ensuring continued participation on the FOMC. Although he did not specify how long he plans to stay, expectations are that he will maintain a relatively low profile and support incoming Chair Warsh during the transition.

Conclusion

The current environment is defined by a combination of strong underlying fundamentals and rising external risks. Key factors continue to support the U.S. economy and financial markets, including robust corporate earnings, sustained investment in AI-driven capital expenditures, and a labor market that, while gradually cooling, remains stable. Together, these elements have helped sustain economic growth and support equity valuations, even as interest rates remain elevated.

In this environment, the balance between resilience and risk is becoming more delicate. Markets remain supported by strong fundamentals but are increasingly sensitive to external shocks. As a result, maintaining a disciplined, diversified approach grounded in quality and long-term perspective remains essential as investors navigate an expansion that continues, but with narrower margins for error.

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